When to switch from a SIMPLE IRA to a 401(k)

Is it time to replace your SIMPLE IRA with a 401(k) plan?

A SIMPLE (Savings Incentive Match Plan for Employees) may have seemed like a cost-effective solution when you were first launching your business, but it’s likely time for a change if your business is growing and you need more flexibility in your plan provisions. 

Here are six reasons a 401(k) is better than a SIMPLE IRA.

1. Employees can save more: The 2019 401(k) deferral limit is $19,000 ($25,000 for employees age 50 or older) compared to $13,000 ($16,000 for employees age 50 or older) in a SIMPLE IRA.
2. Employees can make Roth contributions:After-tax contributions to a Roth IRA are only allowed with a 401(k) plan, which means employees can save on both a pre-tax and after-tax basis to the same plan.
3. Lower cost for you: A SIMPLE IRA is priced on a per-person basis, which means more employees costs you more. Conversely, as the number of employees increase in a 401(k) plan, it becomes more attractive economically to the employer as the associated fees decrease when evaluating on an individual level. 
4. More plan flexibility: 401(k) plans have additional features like more flexibility in eligibility, loans, hardship distributions and varied vesting schedule on employer contributions.
5. Employer contribution options: Employer contribution amounts from year to year in a 401(k) plan can range from zero to 25% of compensation, providing the business more flexibility. These plans also allow the employer to set a vesting schedule. The SIMPLE IRA requires employer contributions (2% of compensation or a 3% match on elective deferrals) that are fully vested immediately. 
6. Stronger oversight: 401(k) plans have more oversight through the plan trustee, administrator, and advisor pertaining to fees, investment selection and employee education. The SIMPLE IRA has very little oversight in these areas. 

Here’s what you need to know if you do want to switch to a 401(k) plan for the next calendar year:

• You will have to terminate your existing SIMPLE IRA with a required notice to employees before November 2. 
• The SIMPLE IRA must be fully funded and continue through the end of the calendar year. 
• Rollovers from the SIMPLE IRA to the 401(k) plan can take place if the SIMPLE IRA has been in place for at least 2 years. 
• You may qualify for a business tax credit to reimburse start-up costs associated with establishing a 401(k) plan of up to $500 per year for a maximum of 3 years.

Whether you stick with a SIMPLE IRA or go with a 401(k), there are many plan compliance issues that a third-party administrator can help you with. To find solutions, contact our team at HCM@wipfli.com or your relationship executive.